Cement sector to consolidate further

14 February 2006

A year has passed since Holcim in a strategic alliance with Gujarat Ambuja Cements began the process of acquiring 34.71 per cent of ACC with capacity of 16.8Mt, the single largest stand alone Indian cement company. Markus Akerman, Holcim CEO, has come on the ACC board along with a Holcim executive committee member. But the feathers of ACC team were not ruffled in any way due to the arrival of Holcim in the capacity of promoter.

A GACL official, therefore, confirms the "good experience of working with Holcim in ACC." What is helping the cause of seamless integration of Holcim work culture and systems is that the Swiss giant has moved into the two Indian companies not through unsolicited hostile bids but by way of convincing the existing promoters of the value it would bring to the table. Soon after inking the deal to take management control of GACL, an announcement to the effect of lifting the capacity of ACC and GACL by 5Mt in the next three years largely through "efficiency route" was made.

Lafarge is a big player in south and south-east Asia. In fact, Lafarge arrived in India five years ahead of Holcim when it bought the cement business of Tata Steel in 1999. Two years later as Raymond decided to exit cement business, Lafarge was once again the acquirer. Since the two acquisitions, Lafarge ramped up capacity to 5Mt and also chalked up a major market presence in eastern India. But unlike Holcim and Grasim, it has missed out on acquiring large capacity blocks of ACC, GACL and UltraTech, the demerged cement business of L&T.

Therefore, Lafarge’s inaction in India on further capacity build up either through new takeovers or greenfield capacity creation is found puzzling. With nearly half the Indian cement capacity having come under two groups, where does the industry go from here? As Holcim and Grasim will now be in a position to impart discipline in the market - this will also be helped by the fact that new capacity in the pipeline is not going to upset the present demand supply equilibrium - the capacity valuation should now be higher.

In the cement industry, enterprise value (EV) per tonne is a metric that is commonly used to understand valuation. We have seen how meteoric was the rise in valuation since Grasim wrested control of UltraTech at $80 a tonne. Holcim valued ACC at an EV of $100 a tonne. But if Holcim has paid over $200 a tonne for GACL, the compelling reasons are the targeted group’s high profitability (over 30 per cent EBIDTA), marketing efficiency, high brand equity and low power consumption of 84kwh per tonne of cement.

What has further added value to GACL is the efficiency at which it dispatches cement, thanks to its own port at Muldwraka and cement terminals at Panvel and Surat and a fleet of seven ships. Last year, Muldwarka port handled cargoes of nearly 4Mt, including bulk cement, coal, gypsum and furnace oil.

In GACL, Holcim finds an aggressive exporter, which was quick to seize opportunities in West Asia. Construction boom is leading West Asia to import more and more cement. No wonder West Asia accounted for a good portion of GACL’s cement exports of 1.76Mt last year.

Holcim’s ready mix cement business in West Asia is around 5Mt and this should offer a new market opening for GACL, India’s biggest cement exporter. GACL also has significant presence in Sri Lanka through a 100 per cent subsidiary. (abstracted from business Standard)
Published under Cement News